Italian Revenue Agency issues ruling on VAT fixed establishment intervention

On 1 June 2023, the Italian Revenue Agency published a tax ruling addressing the VAT fixed establishment (FE) intervention. According to the Italian Revenue Agency, the promotional activities carried out in respect of Italian clients to facilitate the closing of the agreements and manage client relationships indicate that an Italian FE has intervened in a transaction.

1. Background

1.1 The EU framework on intervention of the fixed establishment

Article 192a(1) of the Council Directive 2006/112/EC of 28 November 2006 (the VAT Directive) states that an FE shall be regarded as a taxable person if both of these conditions are met:

1. It makes a taxable supply of goods or of services within the Member State’s territory.
2. The supplier’s FE within the Member State’s territory intervenes in that supply.

Article 53(2) of the Council Implementing Regulation (EU) No 282/2011 of 15 March 2011 (the Regulation) defines the conditions under which an FE is regarded as intervening in the supply of goods or services. Specifically:

• The FE must be characterized by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to make the supply of goods or services in which it intervenes.
• The FE uses its technical and human resources for transactions inherent in the fulfilment of the taxable supply of those goods or services made within the Member State, before or during this fulfilment.

If the FE’s resources are used for administrative support tasks such as accounting, invoicing and collection of debt-claims, they are not regarded as being used for the fulfilment of the supply of goods or services.

The EU VAT Committee has provided some guidance on the concept of “FE intervention” in two working papers (nos. 791/2014 and 857/2015):

• The FE must have a permanent structure and resources that would allow it (hypothetically, by comparison) to supply the services itself.
• The technical and human resources are actually used for the given supply or their use is specifically provided for in the contract.
• The input of the FE’s human and technical resources must have constituted an essential part of the taxable supply.
• The FE intervention principle is only relevant in situations involving both (i) a main place of business established in one Member State and (ii) a fixed establishment and a customer located in another Member State.

1.2 The Italian framework on intervention of the Fixed Establishment

No specific laws have been enacted in the Republic of Italy regarding the concept of FE intervention.

The Italian Revenue Agency’s interpretation of the EU framework on the FE intervention has been detailed in the following documents:

1. Circular Letter No. 37/E/2011, Section 4.5, proposed a wide notion of intervention in which an FE is deemed to be involved when the head office uses, in any way, the technical or human resources of its Italian FE to provide a given supply.
2. Private Ruling No. 954-643/2015 slightly changed the interpretation proposed in Circular Letter no. 37/E/2011, in the light of EU VAT Committee working papers, and clarified that the FE should be deemed as intervening in a supply when it carries out an essential part of the transaction (i.e., when the FE’s technical and human resources are actually deployed in material activities inherent to the taxable transaction).
3. Ruling Letter No. 52/E/2021 clarified that, although Article 53(2) of the Regulation exclusively concerns the supply of goods or services, the same principles also can be applied for the purchase of goods or services in a business-to-business (B2B) transaction. Accordingly, the Italian FE may intervene even with respect to the purchase of goods or services and, thus, must apply the reverse charge mechanism.
4. Ruling Letter No. 57/E/2023 clarified that:
   • If the FE signs agreements with clients in the name and on behalf of the head office or handles marketing activities or client relationships, this does not necessarily imply that the FE is intervening in the supply performed by the head office. However, if the FE’s activities relate to the essential features of the product offered by the head office because they affect the quality, structure and functionality of the product, and in performing its activities the FE shows significant level of autonomy from the head office, the FE shall be deemed to intervene in the supply.
   • The FE’s intervention in a VAT transaction must be analyzed on a case-by-case basis.

2. Ruling Letter No. 336 of 1 June 2023

2.1 The case

A company (referred to generically as “Alfa”) incorporated in the Grand Duchy of Luxembourg that carries out individual portfolio management. Specifically, Alfa’s activities involve: (i) marketing to potential customers, (ii) providing an information desk, (iii) studying financial markets, (iv) offering a choice of investment strategies, (v) verifying documentation to be sent to custodian banks and (vi) reporting to customers.

According to the agreement entered into between Alfa and Italian clients, the Luxembourg company is authorized to manage the client’s assets at its own discretion, within the investment strategy originally defined.

The Italian FE activities may be summarized as follows:

• Conducting promotional activities vis-à-vis Italian clients, to facilitate the closing of the agreements, particularly relating to researching and contacting Italian clients
• Drafting the legal documents
• Managing client relationships post-closing

Italian clients paid fees to Alfa for the supply of portfolio management services. The Italian FE received from Alfa — under its transfer pricing policy — revenue equal to the 40% of the fees that the Italian clients paid Alfa.

2.2 The Italian Revenue Agency’s opinion

In rendering its opinion, the Italian Revenue Agency clarified that:

• The principles affirmed in the previous circular and ruling letters are still applicable.
• Alfa and its Italian FE carried out an “intangible business” not characterized by a significant degree of permanence in terms of human and technical resources. Therefore, the adequacy of the FE structure must be analyzed by considering the business that the FE actually conducted.
• The activities of promotion, marketing, drafting of the legal documents and client relationship management may qualify an FE’s intervention.
• Although the FE must comply with the decisions of the head office, its role may still be “qualifying” and, thus, not merely administrative or support oriented.
• Additional markers of the FE’s intervention include: (i) the Italian clients are a significant portion of the total mandate entered into by Alfa and (ii) the revenue that Alfa allocated to its Italian FE is a significant portion of the total revenue.

These arguments lead the Italian Revenue Agency to conclude that Alfa’s Italian FE intervenes in the transaction and, thus, it qualifies as a VAT taxpayer in Italy.

3. Implications

The notion of FE intervention is not linked to specific requirements identified by the EU or Italian VAT framework. Thus, the absence of this notion leaves to the Italian Revenue Agency wide discretion in the interpretation of Article 192a(1) of the VAT Directive, potentially affecting tax inspections.

Even though the Ruling Letter No. 336/E of 1 June 2023 is binding exclusively for the Italian Revenue Agency with regard to the applicant and not in respect of other taxpayers, in light of the conclusion reached in the ruling, each non-Italian resident person with a VAT FE in Italy should analyze:

• The supply of services or goods that may be relevant for VAT purposes in the Republic of Italy
• The counterparty of these transactions
• The effective intervention, or not, of the Italian FE in the transaction (even if only partial)

Moreover, each non-Italian resident person with an Italian FE that potentially meets the requirements set out above should evaluate the Italian Revenue Agency’s ruling to understand:

1. Whether the Italian FE actually intervenes in the VAT transaction
2. Who is the correct taxpayer (i.e., the party responsible to issue/receive the invoice, pay VAT, etc.)

For additional information with respect to this Alert, please contact the following:

Studio Legale Tributario, FSO Head of Tax

• Paolo Zucca

Studio Legale Tributario, FSO Indirect Tax

• Gabriella Cammarota

Studio Legale Tributario, FSO International Tax and Transaction Services

• Antonfortunato Corneli
• Giancarlo Tardio
• Marco Ragusa

Studio Legale Tributario, FSO Business Tax Advisory

• Giovanni Bisleri

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.